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Robust Digitization to Drive Red Robin Comps, Traffic Woes Stay

Zacks Equity Research
·4 min read

Red Robin Gourmet Burgers, Inc.’s RRGB increased focus on off-premise sales, outdoor seating expansion and digital initiatives bode well. However, a rise in labor and other operating expenses along with coronavirus-related woes is concerning.

Let’s delve deeper.

Key Catalysts

Red Robin’s efforts to improve sales through expanding seating capacity along with strong off-premise sales through carryout and third-party delivery services bode well. On Sep 10, the company provided an operational update, which showed a sequential improvement in comparable restaurant revenues.

In fact, for the weeks ended Aug 2, Aug 9, Aug 16, Aug 23, Aug 30 and Sep 6, comparable restaurant revenues fell 35.4%, 32.9%, 30.6%, 26.1%, 22.1% and 21.9%, respectively. The company's recent comps performance gives an indication that gradually sales are improving.

Meanwhile, the company’s off-premise sales have increased sharply compared with the pre-COVID-19 levels. During the second quarter of 2020, off-premise sales increased 208.7% and accounted for 63.8% of total food and beverage sales. Notably, the increase was primarily attributed to its focus on all off-premise sales channels, carry-out, third-party and Red Robin delivery (or last mile). Also, reductions in menu along with refined operating processes resulted in timely pickup and delivery.

Moreover, Red Robin has been investing significantly in technology and data infrastructure. In fact, the company is working with each provider to better integrate into its POS and KDS systems, and ease the intricacy in operations teams. Nonetheless, the company’s initiative of moving call-in ordering to a centralized call center is yielding positive results and is thus slowly expanding its reach to ensure quality experience.

Red Robin, which shares space with Jack in the Box Inc. JACK, Papa John's International, Inc. PZZA and El Pollo Loco Holdings, Inc. LOCO in the Zacks Retail - Restaurants industry, continues to focus on three areas — revenue growth, expense management and efficient capital deployment — to drive profitability. On the expense front, the company is focusing on a new supply chain management software, replacing its older manual system. This might result in improved control of waste and cost of goods, significantly reducing inventory levels at its restaurants. It would also allow restaurant managers to interact more with guests, resulting in enhanced guest experience. With majority of the dining rooms reopened, the company has accelerated the implementation of its new hospitality model, TGX or Total Guest Experience, to improve customer experience.

Major Concerns

The coronavirus outbreak has rattled the restaurant industry, and Red Robin is not immune to the effects. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols. Moreover, with increased state and local restrictions, dining rooms in California have been closed again. We believe that the coronavirus pandemic will continue to hurt traffic and sales through the remainder of fiscal 2020.

Red Robin has been witnessing rising costs and expenses in recent quarters. In second-quarter fiscal 2020, restaurant-level operating profit margin came in at 2% in the quarter compared with 18.2% growth in the year-ago period. Restaurant labor costs (as a percentage of restaurant revenue) rose 400 basis points year over year to 39.2% in the fiscal second quarter. The increase was primarily driven by sales deleverage and higher wage rates, partially offset by lower restaurant manager incentive compensation.

Additionally, the company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which are bumping up costs. Also, remodeling and restaurant maintenance are adding to expenses.

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Jack In The Box Inc. (JACK) : Free Stock Analysis Report
 
Red Robin Gourmet Burgers, Inc. (RRGB) : Free Stock Analysis Report
 
Papa Johns International, Inc. (PZZA) : Free Stock Analysis Report
 
El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report
 
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Zacks Investment Research